Four IPOs, LIC, Delhivery, Prudent Corporate Advisory Services, and Venus Pipes and Tubes, hit the stock market in the past one month. All of them recorded a suspiciously high percentage of rejected application forms from the retail category. The bogus applications received in these IPOs range from 30% to 70%.

The real picture about the rejected applications, out of the total, emerges prior to the IPO listing, when it is mandatory for all companies to issue basis of allotment advertisement. Thus, the astounding gap between the numbers of genuine applications versus the applications received gets revealed only after the issue closes. Till that time, one can only see the number of applications received in each category, as displayed on the system of the exchanges.

The concern is not necessarily the rejections or the high percentage of rejections, per se. The real issue is that even the rejected applications appear in the system as genuine applications till the mandated advertisement is published after closure of an IPO. And that is the root of the systemic misinformation that can mislead a gullible investor to subscribe to an IPO due to FOMO (fear of missing out).

Rejected applications inflate the number of subscribers, thus bolstering the perceived popularity of an IPO. This creates an image of investment-worthy IPO, even when rational analysis of other factors may suggest otherwise. This entire gambit negatively impacts only one cohort in the stock market, that is, the retail investors.

“Without creating a mirage of popularity, it is difficult to attract investors to subscribe to IPOs of these companies as prices are fixed at a very high level,” says a market veteran who did not wish to be named.

These words ring true in the background of the hype created around the number of applications these IPOs received. Many market participants suspect the bloated subscription numbers are perhaps being used as a tool to lure gullible investors. They also emphasise that rejected applications should be transparently revealed before the IPO closure to put an end to this misinformation.

On the other hand, if the numbers of rejected applications belong to genuinely interested investors, a very high number of such investors have been deprived of an opportunity to subscribe to an IPO. In this case, the system needs to be corrected to be more retail user friendly.

Rejected application forms of recent IPOs:

In LIC, out of 73 lakh application forms, a whopping 20 lakh forms were rejected, which is around 28%. In Delhivery IPO, out of 1.73 lakh applications, about 58%, or approx. 1 lakh forms, were rejected. In Venus Pipes, out of 6.5 lakh applications, around 2 lakh forms, roughly 30%, were rejected, and in Prudent Corporate Advisory Services, out of 1.53 lakh applications, a massive 1.10 lakh applications, or a record 72%, were rejected.

When a form is rejected because it is filled up incorrectly, or has mistakes like signature mismatch, name mismatch, etc., it is deemed rejected on technical grounds. The percentage of such rejections is usually around 5%, though in the case of LIC it was much higher. To read more details click here.

The other criterion of rejection is when the applicant fails to pay for the amount of shares applied for. In such cases, the application is rejected by terming it as not banked.

In essence, 30% to 70% of applications in the IPOs of LIC, Delhivery, Prudent Corporate Advisory, and Venus Pipes, either defaulted on payment or were incorrectly filled-up.

This implies the number of subscription applications made towards an IPO can no longer indicate the enthusiasm of the market towards an IPO. And it would be prudent not to trust the marketing antics about IPOs being heavily subscribed until after the listing process is completed.

Why such huge percentage of applications are getting rejected:

Questionnaires sent by Fortune India to SEBI, NSE, BSE, and LIC, asking the reason for the rejection of applications did not throw any light upon the matter. LIC only responded by revealing the number of rejections that happened due to technical reasons or not banked. The regulator and exchanges chose not to respond.

Many market veterans point out the increased number of bogus applications is correlated to recent change in SEBI regulation that makes payment through UPI mandatory for applications of subscriptions up to ₹5 lakh.

“A broker applies for subscription to an IPO on behalf of a customer but when it comes to paying for the subscribed shares, the customer refuses,’ says one market veteran on condition of anonymity.

So why do such huge number of people consent to subscribe and then change their minds when they are supposed to pay up? The veteran responds saying it is possible that the broker never seeks customer’s consent before applying as they already have all the data required to apply on behalf of a customer.

“However, a vigilant customer does not pay up when he is sent the link for UPI payment,” the veteran adds. This begs the question: why would brokers take the pains of filling up unconsented application forms when they know the customer may not ultimately pay? Many market participants suspect that such a ploy would only be employed to boost the number of applications, which in turn makes an unsavoury IPO appear to be popular.

“It is possible, but highly improbable, that lakhs of people apply with the intent to subscribe to an IPO and change their minds before making payment,” says a seasoned stock-market investor. “One does not usually decide to subscribe to an IPO on a whim and then back out,” he adds.

Indeed, in the case of LIC IPO, more than 12 lakh applications were rejected as not banked. It seems to be too big a coincidence that over 12 lakh applicants ‘lost interest’ in the LIC IPO after applying for it and thus stopped their banking transaction.

Another market participant points out that a large number of applications helps everybody paint a rosy picture of the Indian stock market. It helps the entire system give out a message that Indian capital markets are flourishing on the confidence of people; it sells the India growth story; it also helps in attracting more participants.

How bogus applications can become a systemic menace?

For an IPO of any company having registered profit for three successive years, institutions have a quota of 50% of the total offered shares while retail and HNI segment are allotted 35% and 15%, respectively. As per norms, any company that aspires to be listed needs to attract at least 1,000 applications from institutions, retail and HNI (high net worth individuals) segments combined. Since retail applications are usually the bulk of the IPO applications, this segment becomes a breeding ground for manipulation. The current numbers indicate that filing bogus applications that ultimately get cancelled is becoming a trend amongst IPOs.

Current listing rules state that issues that are purely offer for sale (OFS) where existing promoters offload their shares, a minimum 75% subscription of total offered shares are required. For IPOs that involve new issuance of shares, minimum 90% subscription is required. If the minimum criteria are not met, the issue gets devolved.

In case of IPO of Prudent Corporate Advisory, which was purely an OFS, despite having the advantage of hype created through bogus applications, it barely passed the minimum subscription requirement of 75%.

This implies that either the Indian stock market is not as deep as projected or the issue prices of IPOs have been pegged at levels that the issuers know to be unattractively costly for the retail participants. In either case, a high number of applications, genuine or not, create a mirage of euphoria for an IPO, in specific, and the stock market, in general.

This also puts a question mark on the intentions of mutual funds that are subscribing to such issues as either anchor investors or qualified institutional bidders (QIB). “Mutual funds gather money from retail and if retail participants shun such issues, then on what ground these mutual funds are subscribing to such hyped issues?” questions a veteran market participant.

Not taking cognizance of bogus applications may create repeat offenders amongst brokers or retail investors. A large number of such people are likely to upset the entire process of IPO system by creating situations that defy logic and hamper informed decision making by serious investors.

Prima facie, it appears that SEBI has no provisions to penalise bogus applicants because, so far, the regulator has not taken any public steps to identify or punish the perpetrators, be it brokers, retail investors or investment bankers. Fortune India could not find any recent case where any penalty or punishment was levied on the parties involved in the menace of high percentage of rejected applications.

Several market veterans suggest the following measures on how to tackle the problem of high number of rejected applications: If the system is up for corrective measures, the first step would be identification of brokers who have delivered high percentage of applications that got rejected, and identifying retail participants who have repeatedly filed bogus applications. They should be enquired about the reasons for their actions. If there are any technical issues that are resulting in a high number of bogus applications, the technology glitches need to be addressed. If technology is not an issue, such entities should be expelled from the system after a stipulated number of defaults. The next step is to give a realistic picture of applications in the exchanges’ system that can reflect the number of rejected applications on an hourly basis as the process of application scrutiny starts. Both these measures may be sufficient to nip this problem in the bud. However, if the regulator does not take the necessary measures now, investors may find it harder to make informed decisions regarding future IPOs because, with time, the problem of bogus applications will only grow bigger.

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